Wednesday, October 05, 2011

Democrats out to chash on yuan bill

Business Times - 06 Oct 2011

Democrats out to cash in on yuan bill

Their move on the bill in Senate and long-delayed FTAs is all about politics and, more specifically, about the jobs issue


SO HERE is the good news: The White House sent three long-delayed free trade agreements (FTAs) to Congress on Monday, putting the deals with South Korea, Colombia and Panama on a road towards final approval after several years of being mired in Capitol Hill's legislative jam.

That probably means that after being stuck in the political limbo for the last two years - thanks to Washington's nasty partisan infighting - the White House and Congress are going to revive the dormant trade liberalisation agenda. Right?

Well, not so fast, because here comes the bad news: The Senate also voted to advance legislation pressuring the Chinese government to stop undervaluing its currency, raising the spectre of a costly Sino-American trade war, which clearly does not sound as a prelude to a re-energised effort to placing the promotion of global trade on the US policy agenda.

So which is it? Is Washington on the path to advancing free trade or to creating trade friction?

It is quite possible that we are not asking the right questions here and that these two recent developments have less to do with the global trade policies per se and are in essence all about politics; more specifically, about the issues that will be dominating the presidential and congressional election campaigns next year: jobs, jobs, and jobs.

The United States signed the trade pacts with South Korea, Panama and Colombia in 2007 under former Republican president George W Bush, and the Democratic-controlled Congress never brought the agreements up for a vote, passing it to the administration of Democratic President Barack Obama.

During the election campaign and in the first months of his presidency, Mr Obama, reflecting the views of his allies in the labour unions and other protectionist interest groups, embraced the notion of 'fair trade' and his administration spent time renegotiating items it found objectionable in the three trade deals.

But against the backdrop of a sluggish economic recovery and high unemployment rates, Mr Obama has decided to place the trade deals at the centre of his activist job-creating economic agenda, arguing that the pacts would help create tens of thousands of jobs and boost US exports by US$13 billion annually.

And notwithstanding the never-ending political battles between the White House and the Republicans on Capitol Hill, the pro-business Republican leadership seemed to agree with Mr Obama on the need to approve the three trade agreements.

But the two sides have been locked in a procedural battle that also involved the issue of jobs. Mr Obama insisted that he would not send the final version of the trade deals until the Senate approved an assistance programme to train workers who lose their jobs to competition from foreign trade.

The Republicans countered that spending on the Trade Adjustment Assistance (TAA) would make it more difficult to reduce the federal budget deficit which, they argue, was the main obstacle to growing the economy and creating new jobs. After months of negotiations, coupled with pressure from the US Chamber of Commerce and other business groups, a coalition of Republicans and Democrats finally passed the TAA legislation last week. And after the Republicans assured the White House that they have now enough votes to pass the legislation in the House of Representatives, Mr Obama sent the trade agreements to Capitol Hill.

House Majority Leader Eric Cantor, a Republican from Virginia, said he expected the House to approve the trade deals next week, raising the possibility that the trade agreement with South Korea would be ready for final passage in Congress when South Korean President Lee Myung-bak arrives at the White House for a state dinner on Oct 13.

The trade deal with South Korea could boost US exports by US$11 billion a year and it could also demonstrate US strategic commitment to an important military ally in Northeast Asia at a time when North Korea is raising major concerns in Seoul. Washington also has an interest in highlighting its military and economic partnership with South Korea as part of a strategy to counter-balance China that has been asserting its influence in the region in recent years.

But, then, it is China and not the US that is South Korea's main trading partner. About a quarter of all South Korean exports go to China and only 10 per cent to the US, while 17 per cent of its imports come from China and only 9 per cent from the US.

So it is quite likely that South Korea's political and economic leaders are going to be very worried about the China-bashing mood on Capitol Hill after the Senate voted 79 to 19 to consider a bill aimed at punishing China for its alleged manipulation of its currency. While the bill has yet to be brought before the House for a vote, the strong support in the Senate by both Democrats and some Republicans for the Currency Exchange Rate Oversight Reform Act of 2011 demonstrates that lawmakers, reflecting widespread public sentiment, are blaming the Chinese for America's job woes.

The proposed legislation would replace the current system under which the Treasury Department is required to cite countries that 'intentionally' manipulate their currencies (which is difficult to prove) to one under which the Treasury would determine whether any foreign currencies are in fundamental misalignment, and propose ways to correct the imbalance with countries that are named. Countries that fail to fix their currencies would be subject to anti-dumping duties and other penalties.

In a way, the campaign against China is part of an effort by the Democrats in the Senate, led by Senator Charles Schumer from New York, to promote the image of their party as the defender of the interests of American workers against China.

'China is by far the biggest exploiter of predatory currency practices,' Mr Schumer said. He insisted that the Chinese currency policies 'artificially raise the price of US exports and suppress the price of imports into the United States, undermining the economic health of American manufacturers and their ability to compete at home and around the globe'.

In fact, it is doubtful that raising the value of the Chinese renminbi against the US dollar will actually help American manufacturers sell their products in China or to encourage them to relocate their factories back to the US. Instead, the manufacturers would probably move their operations to Vietnam and other low-wage economies in Asia and elsewhere.

But Mr Schumer and other Democrats are confident that the passage of a measure targeting China's currency practices would help them win support from voters next year in states such as Ohio, Michigan and Pennsylvania that have lost many manufacturing jobs in recent years, and where unemployment rates remain stubbornly high.

That some leading Republicans in the Senate and the House have expressed their opposition to the anti-China legislation could help the Democrats depict their political rivals as advancing a trade agenda that protects the interests of Big Business and helps destroy American jobs.

Senator Bob Corker, a Republican from Tennessee, warned that the proposed legislation would ignite a trade war with China and devastate the American economy, while Senator John McCain, a Republican from Arizona, argued that the undervalued Chinese currency was not the main reason for America's high unemployment rate.

'China's currency may be part of the problem, but the majority of jobs have been lost for other reasons,' Mr McCain said. 'I have to express amazement that the issue of China currency is taking precedence over the myriad of other issues we should be acting on.'

A key player in the debate over the trade accords with South Korea, Colombia and Panama as well over the legislation targeting China's currency practices is Dave Camp, a Republican from Michigan, who is the chairman of the powerful House Ways and Means Committee. Mr Camp, who is a regarded as a strong ally of US businesses and a supporter of free trade, is unlikely to back an all-out campaign to punish China for its low currency value and would probably try to kill a version of the legislation approved by the Senate.

That could play directly into the hands of the Democrats who are expected to counter the Republican message that their party was opposed to attempts to hurt the 'job creators' - the term they use to describe American businesses - by accusing the Republicans of assisting the 'job destroyers', by refusing to take action against China's currency practices that supposedly help destroy American manufacturing jobs while providing an incentive for American companies to relocate their operations to China.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


Ken Hoop said...

I'm with you on a non-interventionist foreign policy, Mr. Hadar, but we have to rebuild our manufacturing base at home.

Sarah said...

Thanks a lot! You post is really good!

Cloi said...

I liked your approach in presenting this political standpoint!